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Buildouts – Cash Flow and Expectations

If you have ever been a part of a buildout, you know that landlords tend to want strict control over cash flow particularly the review process and the resulting distribution of funds. If you’ve not yet experienced it, should a buildout be in your future, you will. As part of a tenant managed build where you hold the construction contract, this cash flow issues can be frustrating to say the least. Of course, knowing this in advance of a buildout project means you can negotiate the needed terms to make the process easier and less stressful.

The Work Letter

In your negotiation, your work letter should allow for lead-time for payment no more than 30 days from your request for disbursement from the landlord. Most contractors will allow 30 days between invoicing and pay, so this should help to ease the burden.In addition, your work letter should state clearly how the allowance will be paid – to you as the tenant or directly to the contractor, along with what documentation is required by the landlord for easy approval and release. You will also want to have a clear understanding what part of the allowance can be used for soft costs or possibly credited toward your lease costs. A long lead in recovering the disbursement of your landlord allowance can adversely impact your cash flow, especially should you have to pay the contractor first.

The Value of a Construction Manager

Construction Managers (CMs) are experts in seeing that you get your money’s worth by conferring with your architect/engineer, monitoring the buildout process, and understanding all the details of your project. Your CM will look out for your interest in a tenant managed build out, which is well worth their fee. Most CMs fees are hourly, but they can be fixed or based on the square footage of the project.

Making Sure Your Expectations are Met

Even when your landlord agrees to perform a turnkey buildout in which all the risk falls on the landlord, you shouldn’t stop paying attention to the project. You should remain continue to ensure the specifications laid down in your lease work letter regarding your required improvements. Using construction drawings or detailed plans displaying agreed to specifications as a lease exhibit for reference. Though the plans may not be executed fully prior to lease signing, particularly in a turnkey agreement, leaving them out of the agreement may result in additional negotiation and unwanted frustrations as the build out takes place. To ensure that tenant and landlord expectations are met, having each detail along with drawings, attached to the lease agreement protect all parties from disappointment.

For example, as a tenant, you will want to ensure that all bathrooms and common areas of your space are ADA (Americans with Disabilities Act of 1990) compliant and the related costsare covered as part of your allowance. Keep in mind that change orders to already approved plans can also cause delays as well as additional costs to you, the tenant. In addition, in most cases of industrial and retail spaces, the cost and obligation for HVAC and other system maintenance (along with replacements if needed), meter installation, utility taps, and service connections fall fully among tenant costs. If safes or other over-size and over-weight capacity can require floor reinforcement which is typically a tenant cost.

And a Final Word

Due to the expansive issues, along with concerns and details which may arise during your lease negotiations and the provision fulfillment, you should consider the benefits of a commercial tenant lease broker as well as construction manager to ensure your best interests are met.